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DORETTA THOMPSON: Hello, you're listening to Mastering Money, where we explore the many aspects of good financial decision-making. I'm Doretta Thompson, Financial Literacy Leader for Chartered Professional Accountants of Canada. We provide no cost programs and free online resources that help Canadians own their finances and learn the language of money. This season, we're looking at that four-letter word that so many of us know all too well.
Debt. Because understanding and managing debt is easier when you know your options and have the right guidance. My guest today is Guy Gellatly, Chief Economic Advisor in the Analytical Studies Branch at Statistics Canada. Guy's research has focused primarily on business innovation and industrial dynamics. And since 2012, he has led the current analysis group at Statistics Canada, it provides information and analysis on current developments and emerging trends in Canada's economy.
He also supports a range of quality assurance activities and analytical initiatives at the agency. Guy's here to give us a snapshot of household debt in Canada and walk us through what these numbers mean now and how they've changed our country over the course of the economic coaster ride that has been the last three years. Guy, thanks for joining us.
Thank you, Dorota. It's a pleasure to be here.
Let's begin by just an explanation of what Statistics Canada is, what it does, and why is that important?
Sure, Doretta. Thank you. Statistics Canada is the national statistical agency. So our role is to produce the data, the information, the analysis that helps Canadians better understand their economy, their society, culture, environment. Many of your listeners will probably be familiar with the monthly and quarterly economic indicators, the major economic data that come out of the agency on a regular basis.
So, think the consumer price index, gross domestic product, a labor force survey, the merchandise trade numbers. All of that is really designed on an ongoing basis to allow people to get a sense of what their economy is doing, how it's performing. And that leads us to the discussion of debt today. DORETTA THOMPSON: What are the limits on the kind of data that stats can gather about Canadians?
Well, it's a whole host of data, and I'm talking primarily about the economic side, but there's the social side as well. So if you think 350 different survey programs here, the data give you that big aggregate snapshot of how well the economy is doing or social developments as they emerge. One of the standard challenges with big numbers like that for Canada as a whole or for provinces as a whole.
It's a little bit trickier when you get into more granular types of questions about particular types of households, for example. And that's something that we've actually improved pretty substantially over the course of the pandemic. We produce a lot more granular information now on detailed financial conditions in different aspects of the household sector, for example. And we're always trying to improve that. Our labor force survey does that as well.
Before it used to be just kind of the big headline measures. But now there's a great deal of detail on how employment conditions are evolving for specific groups of people. So that's the challenge. The challenge is always sort of timeliness and relevance, and to make the data relevant, you've got to make it speak to very detailed groups of people.
DORETTA THOMPSON: So, the idea is that what you want to get a sense of is when people look at the data, can they see themselves in it, or does it resonate as reflecting somehow their own reality? Exactly, exactly. And it's drawing the link between those headline numbers and the lived experiences of people. That's really the challenge. And a lot of the analysis that we do in support of those headline numbers is geared towards that.
So, when we talk about household debt, how do you at stats can define household debt, and how do you measure it? GUY GELLATLY: Well, you can think of this in terms of total credit market debt. So the sum total of all mortgage loans, non-mortgage loans, including consumer credit that all totals up to about $2.8 trillion. So it's the stock of that debt. That's roughly the size of our current dollar gross domestic product.
Now, I should point out that it's actually much smaller than what you see on the assets side of the ledger. So, total household assets in terms of financial assets and non-financial assets that's about 18 trillion with a T, you take that, and you subtract out the debt liabilities, and you get a net worth for households at about 15.2 trillion, so about $940,000 per household. Now here, Doretta, is an example of one of those big averages. That's how many households here?
Well, about 16.2 million households go into the creation of that average. And the question, of course, is what's the lived experience around those averages? DORETTA THOMPSON: Right, so basically, if we put that at a household debt level, you would look at the total family assets, take away what they owe on those assets, and their net worth would be what's left over. So, if I look at my house, it's what my house is worth minus the debt, or my mortgage is what my assets are in terms of the house.
Yeah, in terms of the house, and then you have the family assets as well.
Right, OK, so big picture, how do you and define debt vulnerability? Because that's the stuff we worry about. How do people know when they're in trouble about debt? What does debt vulnerability mean when you're measuring that?
It depends really on your ability to finance those debt levels, largely through current income flows. I mean, that's the standard way that people look at those big debt numbers. So, you take a credit market debt to disposable income ratio, right? And in Canada, in the second quarter, and I'll take you back to the second quarter, because that's the numbers that are currently out there.
That what we wiped about a nearly $1,000,000,000,000 off of the household balance sheet with those corrections in housing and in equity markets, right? So, a big decline in household wealth there. Took away about 25% of the household wealth that was built up over the course of the pandemic. At that point, the debt to disposable income ratio.
It's about $1 and $0.82 of debt per dollar of disposable income, which is not wildly dissimilar to what we saw in the run-up to the pandemic in 2018 and 2019. But certainly that's a number that has trended higher. It's trended higher since the 2008, 2009 recession. So that's the standard leverage ratio that's often used to assess financial vulnerability.
And, of course, it's going to vary dramatically across household types depending on where you are in the life cycle and where you are in the country.
So, what would be the danger territory for people and being able to service their household debt? A $1.82 for every dollar sounds a little crazy, except that when you build in people's assets and stuff, you realize that there's a lot of offsetting going on.
I don't know if there's a magic number there that kind of hits all of those warning signs. I think it depends on the stability of those income flows. So think about the denominator in that equation, or is it reasonable to expect that those income streams are going to be resilient given all of the uncertainty that's going on? It depends obviously as well on the liquidity of your assets on the other side of the balance sheet as well.
So, again, we've always had reasonably high debt levels over the last few years in this country. And there's always been a question about the sustainability of those levels, but it very much does depend what's going on there in the real economy in terms of jobs and income growth and all of that. DORETTA THOMPSON: Right, so, would you say that a lot of the decline in assets this is what's happening with because we saw this insane rise in housing prices.
And then the housing prices come down, is that basically the driver of that number? It is, it is largely the driver of that number. And you certainly saw that in different areas of the country. I mean, that was really the story.
If you go back to 2016 and 2017, all of the discussion of the housing market was really on Toronto and Vancouver, but with the pandemic, those soaring housing prices were pretty much occurring everywhere, and that had a huge impact on household balance sheets both in terms of inflating the asset values, and then what that meant in terms of debt.
The challenge now, of course, getting back to your question on vulnerability is debt servicing costs are obviously different now than they were at the start of the year, and certainly all the mortgage-related costs now are higher. That sort of the key question in terms of are you getting close to a vulnerability point in terms of the ability of households to meet those debt obligations.
So, can you give us a quick snapshot of the latest numbers. And you said, I think we're looking at Q2, which would be April to June, end of June. The latest numbers for household debts in Canada. So if we're in a good place, if the numbers are concerning, how they compare to historical trends?
Sure, $1.82 worth of debt per dollar of disposable income, that's probably on the reasonably high side. But again, those numbers have trended up over time. And they have a lot to do with what's going on in the housing market, as you pointed out. Not wildly different from pre-pandemic, but certainly different to what we saw during the pandemic. And you mentioned that. That was really a game changer. One thing you saw a lot of over the course of the pandemic was this idea of elevated income flows.
Think of all of the money that's flowing into the household sector through the emergency support programs. Less spending there and more savings, and we saw a lot of that being paid off during that period. Actually a lot of high risk debt too. So it was a positive story in that sense that there was certainly an adjustment on the balance sheet there and households were putting themselves in a more prudent financial position, particularly riskier households in terms of their debt characteristics.
They dropped down to about $1.70. And now it is back up as things have ramped up and as all of that pent-up demand has come into play. We're seeing those debt levels return to their historic levels.
That's a really interesting point though about non-mortgage data we did see. We saw really high savings rates through the pandemic. And we saw people really making very wise decisions paying down those consumer debt credit cards, et cetera. Is that continuing, or are we starting to see savings rates drop significantly, or consumer debt rising significantly?
Well, we're starting to see the debt levels rise significantly. In many cases, they're not where they were prior to the pandemic. So credit card debt, for example, hasn't fully rebounded to its levels. Overall, in terms of debt levels, you are seeing kind of households add to their debt, and certainly in the recent quarter. It was very strong.
It wasn't as strong as what we saw at some point in 2021, when that housing market was really on fire, but a lot of the growth is still on the mortgage side. And now we're seeing certainly some movement to on the non-mortgage side. So those are coming back as households spend. And the question, of course, is once that debt is on the books, what does that mean in terms of pressures where service costs are going?
And what about where we're seeing this geographically across the country? Are they region specific? We mentioned that it used to be it was Toronto, Vancouver you really focused on for mortgage things, but it seems to be more generally across the country. Are we seeing regional or provincial differences? Are there any places where it's actually getting better in the country or?
We are seeing some. It's fascinating. If you look at the total amount of data out there, you know three quarters of it is going to be in Ontario, British Columbia, and Alberta. It's less than two thirds of the population, but a lot of the debt is out there. What you saw during the pandemic is a sharp rise in leverage ratios in places that historically had kind of lower amounts of debt. I'm from Manitoba, so think Manitoba and Saskatchewan. Think about the housing markets in those provinces.
And housing prices, there was clearly a lot of momentum there, and you saw those leverage ratios rise, so they end the period. Now coming out of the pandemic at a much higher level than they were at the beginning. So there was a build up in provinces where you necessarily didn't necessarily see build up. Historically, Prince Edward Island would be a good example out on the East Coast. A similar [INAUDIBLE]. Lots of activity in the housing market and the economy generally there.
So that's generally what you see. It's almost a situation where it'd be hard to say that they were getting better across the board. Some provinces are similar to where they started pre-pandemic, others, like Manitoba and Saskatchewan, are much higher now.
So, what we saw in places in the country where through the pandemic, those real estate assets increased dramatically in value. Are they leveling and dropping faster than in the traditional high cost markets?
I think there is generally a leveling there, pretty much across the board, as I've seen it. You've seen that gradual fade in momentum across the country now as given what's going on with housing prices really over the last seven or eight months. So, yes, and of course, there's two sides to that equation. The second side is what's happening in terms of financing costs and servicing costs, which are clearly rising. So the question on affordability depends upon the interplay of those two things.
But clearly the pocketbook pressures that families are under are quite real. And that seems to be true across the country. We've asked questions on our labor force survey about the number of families in households that are having difficulty meeting the day-to-day expenses. And it's about a third that are having some or a lot of difficulty meeting those, and that's higher than we certainly saw during the depths of the pandemic when the support programs were in place.
And the issue is now what does that mean in terms of where the inflation numbers are and where the economy is likely to head, so lots of questions there. DORETTA THOMPSON: OK, so let's dig a little bit deeper into the latest stats [INAUDIBLE] data, which is Q2. What were the most surprising things that you've seen in the data? It's a good question. And I don't know if it's a surprise for those who read our releases, certainly around household income and debt.
The one word that you saw a lot of over the course of the pandemic was elevated. We had elevated income levels, because of the emergency support programs. We had elevated levels of savings, you mentioned that, and they were in the double-digit range for quite a few quarters there. So they're still relatively high as we come out of the pandemic. Lower spending, because of obviously what was going on, and that led to a sharp kind of reduction in that liabilities.
And now that they're building back up, you get a different view. So, maybe one of the surprising things that we saw, and it's not surprising over the course of the pandemic, was that income disparity and wealth disparity that stuff started to narrow. There was a huge reduction in the poverty rate, for example. In 2020, it was down to 6.4%. It was over 10 in 2019. So there was a lot going on in terms of the redistribution of income and wealth.
And now as we emerge, a lot of the historic patterns there are quickly re-balancing themselves. So, you're seeing a widening of income inequality and wealth inequality. And we lost about 6% of net household worth in that second quarter. And if you are a low income household, it was about 12%. And if you are a younger household, it was just over 8%. So, those historic patterns that you tend to see in those income and wealth spreads are re-balancing towards more historic norms.
And that's something that, again, I don't know if that's a surprise, but it's certainly a notable development.
So what about food prices? If we want to talk about inflation, and that is one of the things that it's everybody seems to be talking about it, because it hits all of us, and we see it week after week after week. How do you measure the impact of inflation? We know we have that basket, et cetera, how do you measure that impact of inflation on food prices? And what does that have to teach Canadians?
Well, the inflation data. There's a rich amount of information there on the key drivers of inflation. So, over the last little while. Obviously, there's the big swings in gas prices, but food costs and shelter costs have been kind of above the headline rate. I mean, food inflation is still in the double-digit range. We can all relate to that out in the grocery stores, right? In terms of the price changes that we've seen.
And just the sheer amount of price momentum there is on grocery items and food. And that's the story. We've done some survey work that tries to assess how families are dealing with those broad based pressures for things like food and for shelter. And there's about a quarter of families. And this was back in the spring, before the inflation numbers peaked. They peaked in June at about 8.1%.
So, even then you were seeing about a quarter of Canadians borrowing money from families, or using credit cards, or taking on additional debt to meet those day-to-day expenses. So, yes, you mentioned the lived impacts. You certainly see them there, but you have to get at them from other data sources as well. So, yes, the pressures are certainly there, and we continue to monitor that, certainly through the labor force survey. And we see the same thing, obviously, in recent months.
Yeah, we saw it in CPA Canada survey as well, where you're starting to see people expressing concerns about inflation. We've referred to it a couple of times, the COVID impact, and we talked a little bit about how the macro level, we saw some really good things. Savings levels going up, debt repayment, especially expensive consumer debt going down even for the most vulnerable Canadians.
We hear anecdotally about things like revenge spending, does the data support that in any significant way, do we have any little windows into that kind of spending?
Revenge spending in what sense, Doretta?
It's kind of a social media term really, but that people have had so much pent-up not being able to spend that now they're out spending like crazy. That's what they call it. They call it revenge spending.
Right, right, we certainly saw the pent-up demand for a lot of those goods and services that we were not consuming ramp up pretty substantially and that started halfway through 2021. So a lot of the economic recovery in that period was being driven off of those types of services that we just weren't spending. So the net numbers to some extent are going to follow that. That has started to taper off now, if you look at the more recent data. I mean, there was a lot of that, right?
That just enthusiasm to get back out there in the world and do stuff, and that accounted for a good chunk of economic activity over that period. Now that's tapering off, obviously, because cost conditions out there are changing.
One of the things I'm wondering about, because you did mention that savings levels are still historically high, is it enough to buffer the impact of inflation, or is this one of the things where you see different people being impacted in very different ways, and that may be the people with the savings, or the people who can afford to manage the increases in inflation, and the bigger gaps that lower levels?
Yeah, I think it's probably the latter. Different people are going to be affected in very different ways, and that speaks to just how much variability there is around those big headline household numbers, right? And in some ways, the challenges are going to be more on the extremes. It's hard to know at this stage. And we probably won't know for a little while. One of the stats that I often went to during those periods of elevated savings.
If you look at the amount of saving in 2020 and 2021, you add it up, you basically have a decade's worth of saving on the household side. So it's an enormous amount of currency and deposits that went into the household sector. Now, as you pointed out, a lot of that wasn't idle. There were households were actively paying down many of those riskier liabilities over that period. And that's a very, very encouraging sign.
But I've looked at some of those numbers the cash and deposits are still fairly elevated there, but it will be difficult to know how long until you start to run down that, and given where the affordability strains are, and given that they're all centered around in many cases, things that we have to consume the food, the shelter, and the transportation, plus all of the additional costs that might be rising in terms of the housing market just your debt service costs across the board.
So there's all this cost pressure and there is this amount of savings sitting there, and it's a question of how those two interact over time. And I don't think we have an answer to that quite yet. But it'll be a fascinating thing to look at as we get deeper and deeper into the recovery.
Right. So what does the data tell us about how Canadians are coping with inflation. Was there anything in the data that surprised you?
No, I think people are going to cope as you would imagine they will, and they'll be making lots of substitutions at the margin to make things work. I mean, they sometimes are difficult to tease out of the big data, but people substituting a lot of durable spending, because it's just too difficult right now, in terms of the pocketbook, to be spending. In the big national account data for the third quarter, the big GDP numbers, you see strong declines in durable spending.
A pullback there on the big ticket items. And that's what you'd expect, obviously, as families run into these financial challenges. We're seeing a fade in some of the discretionary things as well. You mentioned the revenge spending. The ramp up, as we all went out and went back to restaurants, and whatnot. And those numbers have certainly leveled off recently, because they might be obviously more discretionary in view of what those pocketbook challenges are.
DORETTA THOMPSON: So, when you say decline in durable spending, in everyday language durable spending is? Big ticket items. Think cars, furniture. Stuff that tends to be a little bit more expensive that's there for a little while, so to speak. We tend to break it durable, semi-durable, and non-durable, but some major also would be like clothing and things like that. But durable, think those big ticket appliances and things of that sort.
One of the things in the numbers that I have to say really surprised and made me very sad was the prescription drug spending numbers, where people are actually stretching out and not taking their prescriptions properly.
Well, I mean, that just sort of speaks to the extent of the strains and challenges that many families are facing. Sorry, I don't have those numbers in front of me, but it's that substitution at the margin that you're seeing. And that just sort of reinforces the difficulty of those trade-offs for lots of families, right? It's one thing not to go out as much, but that's a whole other magnitude in terms of financial and emotional pressure on families. There's no question there.
And for some of our listeners who may not be familiar with the statistical terminology, et cetera, when you talk about what's happening at the margins, you're really talking about the things people can do when they're right at the edge to try to pull themselves into a safe place?
That's exactly right. Debt is interesting in the sense that you're looking at the cumulative growth and all of those liabilities over time. But it's the ability to meet those obligations and the here and now that is the real challenge, obviously. So, at margin, I'm using that term to basically describe how they're adapting in the here and now.
So, let's pull back for a while and just look at the generational differences on debt load. We tend to see quite different pictures, we're hearing a lot of stress between, say millennials and their whole yes boomer, what was true for you is not true for us, and you don't understand, that kind of thing. Are younger generations taking on more less debt than their parents and grandparents did when they were young. Is there really a significant difference?
Short answer is yes, there is a significant difference. We looked at that actually pre-pandemic around a lot of the discussion of affordability that was happening in 2018 and 2019. And if you do those intergenerational comparisons, like how do millennials compare to young Gen Xers or young baby boomers, there is a big difference in their leverage ratios. Now, the flip side is that they have higher asset values. And again, think of housing and everything here too.
So, a higher net worth, higher asset values, but you're more leveraged as well. And one of the statistics that I went to there was if you compare those millennials to the young Gen Xers I think there'd be about 1.7 times more leverage in terms of their debt to income. When you compare them to the young boomers. It's about 2.7 times more. So, yes, those debt holdings are different.
The fascinating thing about that work when we did it is that if you look at the spread, it is much in terms of high wealth millennials versus low wealth millennials. You see that sort of spread in the previous generations, not nearly to the same extent.
So, if you're very well-educated and a homeowner at a relatively young age in a particular market like Vancouver or Toronto on average you're much further ahead than relative to your counterparts than your parents or your grandparents may have been. So it's an interesting story there.
So, is the spread between haves and have-nots, if you like for millennials, are you saying that it's wider than it was for baby boomers and Gen Xers.
It is wider. Those higher leverage ratios mean you're more vulnerable to things like housing market downturns, right? Because at that stage of your life, you're relatively more invested in housing than, let's say, financial markets. So, yes, it is certainly a greater spread, and you certainly might be a bit more vulnerable there.
Interesting. And, of course, there's also the student loan issue. I think that it seems to me that so many Gen Zs and millennials are dealing with student loan levels that previous generations did not deal with the same level.
Yeah, I don't have numbers in front of me to read, but I'm not going to argue with you on that one. I remember when I went to school. And it was a different ballgame, obviously. DORETTA THOMPSON: Very different. Very different. I mean, I had student loans, but they were nothing compared to what young people have today. Are there any significant patterns you're seeing today that seem to recall historical patterns and historical data? Well, it's funny.
I talked earlier about this idea of rebalancing things. We're shifting back to the kind of normal state of affairs. Sometimes you have to be careful about those types of comparisons, because you can't really talk about debt loads and leveraging without talking about what's going on in the economy, generally. And this gets at the sustainability of those numbers.
Are you seeing the sorts of income growth and income generating opportunities that are going to allow you to be comfortable with those debt levels over time? Think about, when I say, OK, well, they don't look wildly different than 2018 and 2019 in terms of some of these leverage ratios. We're obviously interest rates in a very different place at that point.
So we're in a different world now, both in terms of the inflationary pressures that we're experiencing and in terms of the debt servicing the rises there that are occurring in order to deal with those inflationary pressures. So, it is hard to draw too much from those historical patterns without getting a sense for what's going on out there right now in terms of those other things.
It's funny, though, I'm starting to see a number of articles that are talking about managing inflation and going back and looking for patterns through the '70s and '80s and how people managed inflation then when we know it was double-digit inflation and very high levels. Do you think there are any learnings there, or is it just too different now?
Well, no, I think that there's always basic learnings around the idea of being financially prudent. I mean, that's it. I talk about these aggregate statistics, but I think we can all relate to income flows, and monthly costs, and family budgets, and balance sheets. I mean, we all have some variant of that. And I think we have all we all have some variant of a stress test in our minds in terms of what we would be able to absorb in terms of pressures.
And I think there's those of us who went through that period. And I was certainly one of them. My father was running small businesses in the early '80s. So, I'm intimately familiar with the sorts of pressures that build up quickly on the margin that the families have to address. And keeping all of that sort of in mind is, I think, absolutely critical. Yeah, there are lessons there, and the lessons that those costs can begin to escalate pretty, pretty quickly.
So that's the challenge for many families today.
So, I know none of us has a crystal ball, but does the data give us any kind of insights into what Canadians can expect over the next five years or so? Do you think that any historical pattern suggests that we're more or less likely to fall into more or less debt?
Oh, that's a tough one, boy. It's difficult to project five years out, given all that's gone on in the last three years. I think generally it will depend heavily on where the housing market ultimately settles, right? We've gone through this really turbulent time now. Prices are coming down, selling prices, obviously, and the financing costs are up. So wherever that sort of ultimately settles is going to be about half the story.
And the other half is going to be, do we see some real momentum in terms of income growth going forward. And that's that depends on credit conditions broadly throughout the economy. But that's a critical factor, I think, in looking at the manageability of those debt loads.
Thanks so much for joining us today, Guy. The insight you've given us into Canadian household debt is sure to give our listeners a broader perspective and help them understand debt and how it affects them.
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You've been listening to Mastering Money from Chartered Professional Accountants of Canada. You can click to all the resources mentioned in this episode in the description for this podcast in your podcast app. Please rate and review us. And if you'd like to get in touch, our email is financialliteracy@cpacanada.ca. This season is proudly brought to you by BDO.Solutions helping you turn the page on debt.
Please note, the views expressed by our guests are theirs alone, and not necessarily the views of CPA Canada. This is a recorded podcast. The information presented as current as of the date of recording. New and changing government legislation and programs may have come into effect since the recording date. Please seek additional professional advice or information before acting on any podcast information.
Be well, be kind, and remember managing debt is within your power when you're informed and prepared.
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